Unit Cost Comparison of Full Service Carriers

Air India is Competitive

In a business environment of flat to declining yield, stagnating load factor and a falling passenger growth it is vital that the airlines realise that it is not as much necessary to be price competitive as it is necessary to be cost competitive. Air India appears to be doing just that and its unit cost of operation is comparable to world standard. Airlines selected for the study is a randomly chosen representative sample from Asia (6 airlines), Europe (3 airlines) and the United States (3 airlines). Data for the study has been extracted from the annual report/balance sheet/profit and loss account of the respective airlines as available on their website. For all airlines data pertains to first three quarters of 2007 except for Air India, which is for 2006-07.

Arranged in ascending order, Air India figures around the middle of the list. The difference in the unit cost of operation of Air India and the other airlines that are ahead of it is only marginal; in fact in most cases it is less than a cent. Singapore has the lowest unit cost and Lufthansa has the highest unit cost (almost three times higher than that of Singapore). Asian airlines appear to be managing their cost much better than their counterparts elsewhere in the world. At 10 cents and more unit cost of European airlines is appreciably higher than that of Asian airlines. Among Asian airlines only Jet airways has unit cost of more than 10 cents. See Graph 'Unit Cost'

Cost is Converging

An analysis of unit cost of full service carriers (FSC) across the world shows that airlines cost of operation is converging irrespective of their size and geographic location. For most airlines unit cost is clocking at around 7 to 8 cents. On the other hand, unit cost for most low cost airlines (LCA) is in the range of 5.5 to 6 cents; thus the difference in cost of operation between FSCs and LCAs is narrowing down and moving towards convergence. One fall out of cost convergence among FSCs is that options for competing on cost is also getting reduced. For LCAs cost convergence means that there is imminent danger of LCAs losing their USP of low cost. The dilemma for them would be (cost of operation being the same) to upgrade themselves to FSC or continue with their low fare-low margin strategy and hope that volume will make up the deficit. For FSCs cost convergence is a happy situation as it allows them to charge a premium for the service without incurring additional cost.

Fuel is a constant factor in airline and is now the largest single expense to an airline affecting their bottom line. For example, when Virgin Blue announced that the rising cost of aviation fuel is likely to affect its full-year results, it triggered a dramatic sell-off of shares. Recently, North American Airlines announced it is to discontinue services between the US and Nigeria because of the rising cost of fuel. About a month back Delta Airlines (third largest airline of the US) announced that that it was hampered by high fuel prices in the fourth quarter, it spent $1.36 billion on fuel and related taxes in the quarter, compared with $1.06 billion a year earlier.

Exclusion of fuel cost from calculation reduces unit cost by 25% on average. There are some exceptions, for example, in the case of Lufthansa and Air France-KLM unit cost falls by 18% and 16% respectively. Similarly unit cost falls by 38% for Singapore Airlines, by 29% for Emirates and by 36% for Air India. Relative positions of airlines remain more or less the same except that Air India now moves to third place from sixth. See Graph 'Unit Cost w/o Fuel'.

Composition of Unit Cost

(USCents/ASKM)

	Singapore Airlines	Emirates	United Airlines	Delta	Air India	Conti-nental Airlines	Malaysia Airlines	Jet Airways	British Airways	Air France KLM	Lufthansa
Labour	0.011	0.011	0.017	0.017	0.011	0.019	0.013	0.013	0.031	0.031	0.029
Fuel	0.025	0.020	0.020	0.019	0.028	0.020	0.027	0.033	0.026	0.020	0.034
Lease	0.002	0.008	0.002	0.000	0.009	0.006	0.012	0.006	0.001	0.003	0.000
Others	0.028	0.030	0.037	0.042	0.032	0.036	0.033	0.082	0.049	0.073	0.119
Unit Cost	0.066	0.069	0.075	0.078	0.079	0.081	0.086	0.133	0.107	0.126	0.183

Labour costs one cent in the Asian region, two cents in the US and 3 cents in Europe. For most airlines lease rental forms an insignificant part of unit cost while fuel cost ranges between 2-3 cents. Air France-KLM labour cost is significantly higher than its fuel cost; the airline managed a lower expenditure on fuel because of its successful hedging operation. See Graph 'Share of Fuel and other Expenses'